Equity Fund Of Funds Are Underappreciated. Here’s What They Bring To The Table

Imagine this. It’s a typical sunny day in April. You walk into the office of the fund manager of the top-ranking equity mutual fund you intend to invest into. You sit across him at the table. You have a chat about his views on the market and understand the ‘what’s and whys’ of his stock portfolio, which you will soon own. All this while you sip on a cup of tea. This meeting gives you a chance to judge the quality of the research and fund management that backs this fund. It also gives you insights into the conviction and discipline of the fund manager, something that plain numbers couldn’t tell you. Having adequately delved into your fund manager’s mind, you feel informed and assured to invest your hard-earned money into this fund. 

Or...

The equity fund you’ve owned for years has just announced a change of fund manager. The fund has generated decently good returns for you, and you are sitting on gains. But you can’t help but worry about how the change will impact the fund’s performance going forward. You have questions and doubts, and rightly so. You want to know if the fund will be run using the same strategies and processes, or will the new guy bring in change. If you stay on, and the fund can’t sustain its historical performance, you’ve lost both time and money. If you exit the fund prematurely, or without good reason, you will be subject to capital gains taxes, and will miss out on the fund’s future performance. Only if you get a chance to meet the fund management team, or simply get on a call with them and get your questions answered, things would be so much simpler. You could take an informed decision with confidence and peace of mind. 

The scenarios above, though ideal and advantageous, are not a reality in the mutual fund investing ecosystem. Most investors must rely on past performance and star ratings to make their mutual fund choices. While these make a good starting point, they are not enough for a comprehensive analysis. That’s because there are various qualitative and subjective factors like the fund house’s investment philosophy, adherence to fund mandate, liquidity, and risk management frameworks, etc. that need to be judged, which isn’t really reflected in the numbers. 

This gap is addressed by a category of mutual funds called Equity Fund of Funds. An Equity Fund of Fund invests your money in diversified equity schemes after extensive quantitative and qualitative research, saving you from the complex, yet critical task of choosing quality, consistent funds for your equity investments. Not only are the underlying schemes subjected to hardcore number crunching and detailed analysis, but they are chosen only after gaining valuable insights from one-on-one interactions with the fund managers themselves, something that retail investors don’t have easy access to. 

In addition to giving investors this edge, an Equity Fund of Fund reduces the hassles of making and tracking multiple investments. A single net asset value (NAV) is all you need to check. Moreover, the fund can rebalance and reallocate your money from underperforming schemes to better-performing ones more efficiently than you. This is because, unlike you, as a pass-through vehicle, the Equity Fund of Fund doesn’t have to pay tax when exiting a scheme. This benefit is passed on to you and eventually translates into higher returns.

With multi-fold benefits, Equity Fund of Funds can be a good way to take your equity investing to the next level.  Equity Fund of Funds are just the logical extension of why you came to mutual funds – to make your investing simple and efficient. It’s time you understand and embrace them!

The author is associate fund manager- alternative investments. Quantum AMC.

(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)